Bubble Meter is a national housing bubble blog dedicated to tracking the continuing decline of the housing bubble throughout the USA. It is a long and slow decline. Housing prices were simply unsustainable. National housing bubble coverage. Please join in the discussion.

Monday, August 20, 2007

Stated Income Disapearing

“One of mortgage planner Robert French’s clients, who earns about $700,000 a year and has a high credit score, was recently unable to get a stated-income mortgage. These loans became popular during the housing boom because it does not require borrowers to provide a copy of their W-2 tax form to the lender.”

Wow ... this is shocking. Posters on here who don't understand why someone who makes $700K per year "needs" a mortgage. Obviously, there's no sense in trying to explain to them that "needs" are relative and that someone making that much is probably smart enough to know that they "need" to shelter a lot of their income via the tax-beneficial aspects of deductible mortgage interest ... And that money sitting in a house is money that could otherwise be out there earning a higher return elsewhere.

Capital One Financial Corp. plans to shut down its struggling GreenPoint mortgage unit, becoming the latest casualty in the mortgage meltdown.

Capital One bought GreenPoint in last year's $13.2 billion purchase of North Fork Bancorp, of Melville, N.Y. North Fork had earlier paid $6.3 billion for GreenPoint Financial Corp., then a large N.Y. savings-and-loan specializing in mortgages.

The unit specialized in so-called nonconforming loans, which do not meet the standards set by Fannie Mae and Freddie Mac, the government-sponsored providers of mortgage funds. GreenPoint specialized in "jumbo" loans above the $417,000 limit and Alt-A loans to home buyers who do not fully document their income or assets.

Citing great difficulty selling loans to the secondary market, Capital One officials said the bank will closing GreenPoint's 31 locations and eliminating 1,900 jobs immediately. The credit-card giant said the subsidiary would not make any more new mortgages but will fund those in the pipeline with locked-in rates.

In a statement, Capital One, McLean, Va., said it will take an after-tax charge this year of $860 million, or $2.15 per share. The company is revising downward its 2007 earnings guidance to approximately $5 per share.

Capital One made its name in the direct marketing of no-fee credit cards but has been on a two-year quest to become a full-service bank.

Capital One was optimistic when it acquired GreenPoint that the mortgage unit's national footprint and infrastructure would give it immediate scale and a growing earnings stream. But the housing market slowed shortly after the purchase and investors cooled on nonconforming mortgages.

Capital One lost $9.69 million on its mortgage unit in the first half. The company said recently that it was slowing the origination of new mortgages to drain its pipeline but was still having trouble selling packaged mortgages and could not easily hold them.

Chairman and Chief Executive Officer Richard D. Fairbank said in an internal memo Monday to employees that the decision was "the function of an unprecedented set of market circumstances."

Wow . . . this is not shocking: Lance thinks it makes good economic sense to pay $3 in interest so you can save $1 in taxes. Apparently, he dosen't realize he is still $2 in the hole to the bank. Probably why he has an interest only loan. The more interest you pay the better off you are, right Lance?

"Posters on here who don't understand why someone who makes $700K per year "needs" a mortgage."

No, we posters don't understand why a person who earns $700,000 a year needs a stated-income loan instead of taking out a regular 15 or 30 year mortgage. There used to be an old saying that went something like this,"You can get a loan from a bank just as long as you can prove that you don't need the money"If this guy has the income, why not just do a regular 15 or 30 year full document mortgage?Perhaps the bank wants more of a paper trail so as not to get into any lawsuits from borrowers in the coming years.

"Obviously, there's no sense in trying to explain to them that "needs" are relative and that someone making that much is probably smart enough to know that they "need" to shelter a lot of their income via the tax-beneficial aspects of deductible mortgage interest."

If this person making 700K per year thinks he "needs" a tax deduction for mortgage interest, than this self-same person obviously never heard of the Alternative Minimum Tax, which erases the mortgage deduction from one's income tax calculations, especially if he is pulling in 700K a year.

"... And that money sitting in a house is money that could otherwise be out there earning a higher return elsewhere."

Higher return? Where? Oh, you mean hedge funds that invest in CDOs, great return on your money, if you ever get any of it back.

Caveat Emptor said... "Wow . . . this is not shocking: Lance thinks it makes good economic sense to pay $3 in interest so you can save $1 in taxes. Apparently, he dosen't realize he is still $2 in the hole to the bank. Probably why he has an interest only loan. The more interest you pay the better off you are, right Lance?"

Ok Caveat, you've really exposed yourself on this one. You really don't understand the opportunity cost of tying up your money in property, do you?

In brief, if you're paying 5% on a mortgage, once you take into account the tax benefit you're really only paying something like 3%. Compare that to investment opportunities out there that even under the worst circumstances will net you 5% (after taxes.) That $500,000 you've socked into the house to pay it in full earns you nothing ... zilch ... other than the 1% (netted of inflation) you can expect from house appreciation over the longterm.

Now if you have a mortgage instead for $500,000 and are paying that after-tax rate of 3% ... and investing that $500,000 and earning an after-tax rate of 5% (which is conservative given that most equity investments average 10% pre-tax), you've just netted 2% a year on that $500,000 ... AND you still get the 1% on the house when you sell down the road.

Anon 3:53 said:"If this person making 700K per year thinks he "needs" a tax deduction for mortgage interest, than this self-same person obviously never heard of the Alternative Minimum Tax, which erases the mortgage deduction from one's income tax calculations, especially if he is pulling in 700K a year."

Anon, you need to shore up on your tax code. Home mortgage interest (and second home interest) is one of the few areas exempted from the AMT ... Hence creating even more of a need for the mortgage interest deduction by this high roller.

Anonymous said... "That's a pretty flimsy explanation, Lance. But for the sake of argument... assuming you are somehow right, how do you explain why they need to go stated income?"

I didn't say they needed to go stated income, did I? From the little I know about these loans people get to pay a higher interest rate in exchange for not having to disclose their sources of incomes ... Why this guy wouldn't want that information known is not my business ... or yours. I'm constantly amazed at how the BHs think they have a right to tell others what kind of loan they should take, how they should document it, etc. They ought to be more concerned with how they can get themselves into a home ... then in why/how someone else bought a home.

I need advice about buying or leasing commercial real estate in N.E. DC. I am with a the Archie Edwards Blues Heritage Foundation (www.acousticblues.com) and we currently occupy a former barbershop on Bunker Hill road. We may be vacating on very short notice. Ideal would be a store front with 20 x 40 sq feet, a bathroom, wheelchair access, plenty of on street parking. Any suggestions about where I should be looking or who I should be talking to would be appreciated.

Well, he wants obviously wants to go stated, since he really hasn't made $700k a year AFTER expenses for the last 2 years on his tax returns.

Why the H would anyone who really made that money AFTER expenses be too lazy to pull out 2 tax returns or W-2's? The monthly additional cost on a large loan is significantly higher for "stated", because the borrowers were full of S.

Seriously, loans are available for those who really qualify, the problam in a nutshell is that so many didn't over the last 5 years and that is what drove up the prices.

Anon 11:09 said:"Seriously, loans are available for those who really qualify, the problam in a nutshell is that so many didn't over the last 5 years and that is what drove up the prices."

That's right, everyone with a credit score lower than YOURS should have automatically been disqualified from getting a mortgage. THAT would have ensured that YOU'd have more available to choose from for YOURself.

The thing is, by going stated income, your made up 5% mortgage rate scenario from you 8:10AM post is even more unrealistic. It was bogus to begin with, but anybody competently pursuing interest rate arbitrage would obviously not opt for a loan with a higher rate. Stated income loans have significantly higher rates.

By the way, the mortgage interest rate deduction begins to get phased out once your income exceeds $150K, completely independent of the AMT. This is just in case anybody reading this blog thinks you are providing legitimate information and aren't just trolling. You're only here because you enjoy getting people riled up and I don't think you actually believe the tripe you write.

Lance said... “Why this guy wouldn't want that information known is not my business ... or yours. I'm constantly amazed at how the BHs think they have a right to tell others what kind of loan they should take, how they should document it, etc.”

When there are talks afoot of government bailouts for these FB’s, yep. If you’ve been so irresponsible that my tax dollars go to fund your mistake, it is my business, as a matter of fact, it now becomes my responsibility to do so.

Jack said:"Whoever gives "no doc" loans to people with no or tiny downpayments has no room to complain. That's sheer idiocy. No wonder the mortgage industry is in this mess."

But they don't ... That's the Bubbleheads speaking.

Here's what Wikipedia has to say:"Many banks also offer reduced documentation loans which allows a borrower to qualify for a mortgage without verifying items such as income or assets. Naturally these are higher risk loans and often come with higher interest rates. Because less documentation is provided on the capacity of the borrower, there is a high emphasis on the credit and collateral.

To mitigate the risk of reduced documentation loans, lenders will often not lend to higher LTVs and limit the loans to smaller loan amounts, compared to loans that are fully documented."

Just because its in Wikipedia doesn't make it true. The fact is that in the 2002-2005 era, more and more lenders were handing out no-doc, no (or low) down loans. Usually dual no-docs, a no-doc primary and a no-doc HELOC. Part and parcel with the insane slipping of standards which is now melting down the credit markets.

Lance, you are spectacularly stupid, and the "bubbleheads" are right, and you are wrong, as usual.

Yes, classic underwriting norms do dictate that you demand higher down payments for reduced and no-doc.

Unfortunately, during 2004-2006, major lenders, including Countrywide, deviated from classic underwriting standards and made stated income/NINA loans at over 90% CLTV. That was part of what drove the unsustainable housing bubble. Once these loans turned out to be riskier than Countrywide thought, they've had to change their standards, exactly as we "bubbleheads" predicted.

Jack said:"Whoever gives "no doc" loans to people with no or tiny downpayments has no room to complain. That's sheer idiocy. No wonder the mortgage industry is in this mess."

But they don't ... That's the Bubbleheads speaking.

Here is what Bloomberg had to say back in March, when you were saying that there is no subprime problem. I guess you would call them bubbleheads.

Subprime Meltdown Snares Borrowers With Better Credit By Jody Shenn

March 22 (Bloomberg) -- The subprime credit crunch is beginning to ensnare even borrowers with better credit.

Lenders are increasingly refusing to lend to homebuyers who can't make a down payment of more than 5 percent, especially if they won't document their income. Until recently such borrowers qualified for so-called Alt A mortgages, which rank between prime and subprime in terms of risk. Last year the category accounted for about 20 percent of the $3 trillion of U.S. mortgages, about the same as subprime loans, according to Credit Suisse Group.

``It's going to be very difficult, if not impossible, to do a no-money-down loan at any credit score,'' said Alex Gemici, president of Parsippany, New Jersey-based mortgage bank Montgomery Mortgage Capital Corp. Companies that buy the loans ``are all saying if they haven't eliminated them yet, they'll eliminate them shortly.''

Tighter lending standards may slash subprime mortgage sales in half this year and Alt A mortgages by a quarter, according to Ivy Zelman, a Credit Suisse analyst in New York who covers homebuilders. The new requirements will force some prospective homebuyers to save more money for a down payment or risk being denied credit. Pulling Back Bear Stearns Cos., General Electric Co.'s WMC Mortgage, Countrywide Financial Corp., IndyMac Bancorp Inc., Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Credit Suisse have all said in the last two weeks they're pulling back from buying Alt A mortgages sold with no down payment or in a refinancing of the house's entire value. Such companies facilitate the mortgage market by buying loans and repackaging them for sale as bonds to buyers such as insurers and hedge funds.

"American Home Mortgage rehired all 6,000 employees it laid off last week after someone found that, according to Wikipedia, all of its reduced doc loans actually did adhere to proper underwriting standards. Other mortgage lenders that recently laid off thousands of employees are expected to follow suit."

The recent, frantic efforts of residential mortgage-backed securities (MBS) investors to unload those assets to staunch losses or to raise cash to meet the demands of creditors is going put a damper on MBS prices for as long as another year unless the market can attract at least another $150 billion in new capital now, according to an analyst’s report.

“With the unusual amount of balance-sheet deleveraging occurring in companies that hold mortgages, we believe that roughly $150 billion to $250 billion of permanent capital is needed to normalize pricing in the mortgage market,” said Friedman Billings Ramsey analyst Paul Miller Jr. in a research report issued Aug. 22...

At present, however, “this imbalance between equity and total mortgage debt outstanding is resulting in abnormally low bids for mortgage assets, especially in the non-agency market,” Mr. Miller wrote.

Making it tougher for investors is that “prices need to adjust on all mortgage products in order for new capital to achieve attractive returns. This will be painful, but it must be allowed to play out in an orderly fashion in order for the mortgage market to achieve normalized returns,” according to Mr. Miller’s report, entitled “De-Leveraging Destroying Value—New Capital Needed.”

Unfortunately, “there is no quick fix here,” he wrote, estimating that it will take six to 12 months for the prices of mortgage assets to adjust and for capital to flow back into the space.

So until then, those holding MBS paper are going to continue to suffer financially.

He said the root cause of the deleveraging “is that investors believe the collateral has been impaired, since they expect home prices to decline materially over the next year.”